What ecommerce owners should know about the GST changes

We give the low-down on what the new ‘Netflix’ tax, announced in Budget 2018, means for online businesses.

As the expansion of the digital economy continues at breakneck pace, governments are grappling with how to adapt their tax regimes to capture lost revenues generated from goods and services sold digitally.

According to an Organisation for Economic Co-operation and Development (OECD) report, the digital economy is increasingly becoming the economy itself, making it difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.

In Singapore, ecommerce spending hit an estimated $4.4 billion last year, according to market research firm Statista. By 2025, the ecommerce market here is expected to reach over $7 billion, with cross-border transactions making up roughly 55% of the market.

The ‘Netflix’ tax

To address this increasingly large segment, a new rule to tax digital services was unveiled in the recent Budget statement by Finance Minister Heng Swee Keat.

Under this, overseas businesses that provide digital services, such as streaming content, are liable to pay the Goods and Services Tax (GST). Specifically, vendors based overseas whose annual turnover globally is more than $1 million and who make over $100,000 from the sale of digital services to Singapore consumers, are liable to pay GST.

This means that in practice, if the GST is passed on to the consumer, Singapore subscribers to Spotify’s premium service, for example, will have to pay $10.60 each month, up from $9.90 monthly, once the 7% GST is taken into account. This figure will rise to $10.80 when the GST increases to 9% between 2021 and 2025.

Besides subscription-based media like Spotify and Netflix, services that fall under this new regime will include downloadable digital content like mobile apps and e-books, electronic data management like website hosting and cloud storage services, and listing fees on electronic marketplaces.

The new GST rules are in line with the policies of the OECD’s Base Erosion and Profit Shifting project, which aims to implement a framework to tackle tax avoidance by multinational companies.

The group’s recommendations in its action plan to address the digital economy include shifting tax collection to the jurisdiction of consumption, and for taxes to be collected on low-value ecommerce transactions by putting consumption tax obligations on the vendor.

What it means for online business owners

If you own an ecommerce business that makes more than $100,000 from the sale of digital services to consumers here, you will need to either charge a 7% GST or absorb the tax. The challenge is to carefully assess the competitiveness of your product and whether you would decrease your revenue by passing on the cost.

You may also want to look into ways to create compelling reasons for consumers to buy your services by shifting their focus away from the cost. By providing rich, unique user experiences – for example, adding personality and conversation rather than more conventional interface elements and tone, using reviews to build trust, or ensuring a good returns management system – and making the customer journey more meaningful, consumers may see the value behind your services, even if they cost more.

$400 threshold to remain — for now

The new “Netflix” tax rule does not apply to imported goods sold digitally – at least for the time being.

Currently, consumers must pay GST on goods whose value is above $400 that are imported via air or post, such as in online shopping. This will remain for now, as the government looks to review ongoing international developments and discussions to see how taxation on lower-value items can be applied.

However, businesses need to be aware that while they are currently spared the GST obligation, this will likely come in subsequent years, so it is best to be prepared for this. Again, differentiating your products and creating a pleasant consumer journey can help increase customer retention.

Invoice your customers appropriately

The rules for invoicing your customers remain the same. If your company is registered for GST in Singapore, you will be required to issue tax invoices for goods and services sold to another taxable person.

The invoice may be in physical form or, for sales over the Internet, in electronic form. Invoices must show the total amount payable without tax, with the rate of GST and total tax chargeable shown separately, as well as the total amount payable including tax.

And like other local GST-registered businesses, you will be required to maintain business and accounting records for at least five years to support GST declarations. You should also retain and make available upon request documents to support the GST collection, such as invoices, sales listings, payment evidence and customer information.

Keep them coming back for more

The burgeoning digital economy has introduced wider tax challenges for regulators and policymakers, creating obstacles for the collection of consumption taxes, particularly on goods and services bought by customers from suppliers overseas.

As Singapore begins introducing tax obligations and increasing the cost of digital services, it is more important than ever that online business owners continue to create better customer experiences and improve their product offerings to keep them coming back for more.

As the expansion of the digital economy continues at breakneck pace, governments are grappling with how to adapt their tax regimes to capture lost revenues generated from goods and services sold digitally.

According to an Organisation for Economic Co-operation and Development (OECD)